Philip R. Lane: Climate change and monetary policy

SPEECHClimate change and monetary policy Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the Climate, Nature and Monetary Policy Conference jointly organised by the ECB, the Centre for Economic Transition Expertise and the Frankfurt School of Finance and Management Frankfurt am Main, 5 May 2026IntroductionGlobal warming is no longer a distant threat.[1] The Copernicus Climate Change Service has confirmed that 2023, 2024 and 2025 were the hottest years in recorded human history (Chart 1, panel a).[2] The changing climate has also increased the frequency and intensity of extreme weather events: more severe heatwaves, longer-lasting droughts, heavier rainfall and flooding, and more destructive wildfires, to name just some cases (Chart 1, panel b). The evidence indicates that global warming has accelerated, with recent studies indicating that the planet is heating faster than at any point since the start of the available observational time series in the 1880s.[3] While climate change transition policies have been implemented and are planned in many countries, the world is on a trajectory towards a warming of around 2.8 degrees by 2100 under current policies and 2.3-2.5 degrees if all Paris Agreement policy commitments are delivered.[4]Chart 1Climate change and EU climate policiesa) Global mean temperature anomaliesb) Extreme weather event indexc) EU greenhouse gas emissions and EU targets(°C compared with 1850-1900 average)(index)(million tonnes of CO2 equivalent)Sources: World Meteorological Organization (WMO), International Foundation Big Data and Artificial Intelligence for Human Development (IFAB), European Environment Agency (EEA) and ECB staff calculations.Notes: Panel a): Average across nine global temperature datasets. Panel b): European Extreme Events Climate Index (E3CI), combining seven extremes, including extreme max/min temperature, drought, extreme precipitation, hail, fire, extreme wind. Standardised anomaly with respect to the reference values (1981-2010). For each individual category, an index above 1 indicates an extreme event. The chart shows the arithmetic average across all seven categories. An increasing average score indicates increasingly frequent and severe extreme events. Panel c): As of 2024, 14 EU countries have implemented carbon pricing. The red dots refer to EU emission targets. The latest observations are for left-hand side chart - 2025, middle chart - 2024 and right-hand side chart - 2024.Global warming and the increase in extreme weather events cause substantial economic damage. Recent analysis suggests that global GDP per capita would be more than 20% higher today had no warming occurred between 1960 and 2019: this corresponds to a 0.3% reduction in the annual growth rate over this period.[5] While climate change might account for only a limited proportion of the annual variation in growth rates, its persistence means that its cumulative impact is substantial. In response, the European Union has agreed to ambitious climate policy targets, anchored by the Fit for 55 package - a set of laws adopted in 2023 committing the EU to reducing greenhouse gas emissions by at least 55% by 2030, on the path to full climate neutrality by 2050 (Chart 1, panel c).[6] The EU commitment to the green transition not only contributes to the required global slowdown in greenhouse gas emissions but also increases the resilience of the European economy, including by reducing dependence on imported fossil fuels.[7]Overall, both climate change and transition policies are highly relevant for central banks through their impact on output and inflation dynamics, together with their impact on asset prices, financial intermediation and financial stability.[8] For these reasons, in its 2021 Monetary Policy Strategy Review, the Governing Council committed – within its mandate – to ensuring that the Eurosystem fully takes into account the implications of climate change and the green transition for monetary policy and central banking.[9] In line with this commitment, the ECB and the Eurosystem have undertaken significant efforts to integrate climate change into their economic analysis, modelling and forecasting and their assessment of the transmission, stance and design of monetary policy. In today's speech, I will describe how the ECB delivers on these commitments in the ways we monitor the economy and formulate our monetary policy. In the first part of my speech, I will discuss the economic analysis of climate change and the green transition at the ECB. In the second part, I will turn to the implications for monetary policy.[10] Economic analysis of climate change and the green transition at the ECB In this section, I will first discuss how a changing climate affects output and inflation, in the near term and at longer horizons. I will then examine the implications of the green transition for the euro area economy. Finally, I will discuss how the ECB has expanded its macroeconomic modelling toolkit to incorporate these factors and how it applies these expanded models in economic analysis and forecasting.The impact of climate change on the euro area economy Impact on outputExtreme weather events disrupt production, affect energy demand and supply, damage property and infrastructure, and reduce labour supply. While any individual extreme weather event can be viewed as a temporary shock to the economy, the cumulative effects of global warming can lower potential output through the degradation and loss of agricultural land, shifts in tourism, higher rates of mortality and sickness, climate-induced migration and reduced labour efficiency from higher temperatures.[11] In addition, the uncertainty associated with more frequent extreme events can dampen investment and innovation, weighing on future growth trajectories.[12] As discussed above, the overall weight of analytical and empirical research indicates substantial long-run economic damages from climate change, even if the range of estimates varies widely. The slow-moving negative trend contribution of climate change to output is relevant for monetary policy to the extent that the trend in potential output anchors the analysis of shocks around the trend: mis-identification of the trend in potential output can lead to mis-diagnosis of cyclical shocks. At the same time, the primary focus of monetary policy is in managing cyclical shocks. In particular, purely transitory shocks need not trigger a monetary policy reaction, whereas longer-lasting persistent shocks may call for an adjustment in the monetary policy stance. It follows that, in analysing the cyclical impact of extreme weather events, the persistence of the shock plays a central role in determining the implications for monetary policy.The effects of different types of extreme weather events also vary across countries and sectors. A detailed study that assesses impacts from extreme weather in the short-term for Germany, France, Italy and Spain reveals that activity in the pharmaceuticals sector appears to suffer especially under extreme heat.[13] By contrast, electricity and gas benefit from a boost in demand due to extreme cold snaps, while supply disruptions or efficiency losses under extremely high temperatures curb activity at longer horizons. Moreover, mining and construction appear to be particularly vulnerable to extreme rainfall, whereas these sectors tend to be favoured by extreme droughts, reflecting the high exposure of their operations to precipitation extremes.In line with the findings in these studies, firms participating in the Survey on the Access to Finance of Enterprises (SAFE) report somewhat heterogeneous views on how important are the consequences of climate change (Chart 2). Firms located in parts of southern European countries attribute a higher importance to the risk of extreme events (“natural hazard risk” in Chart 2), whereas the risks from nature degradation are also assessed as high in parts of Germany and France (“degradation risk” in Chart 2).Chart 2Firms’ assessment of the importance of consequences of climate change for the next five-yearsa) Natural hazard riskb) Degradation risk(1980-2023 average; percentages)(x-axis: quarter, y-axis: percentage points)Sources: ECB and European Commission Survey on the access to finance of enterprises (SAFE). Notes: The maps show the weighted average score for the importance of consequences of climate change for firms over the next five years by main socio-economic regions based on NUTS1 (2016 classification) in the euro area. Firms were asked to indicate how important the consequences of climate change (natural hazards, environmental degradation, and stricter climate standards) are for their current business model five years ahead on a scale of 1 (not at all important) to 10 (extremely important). The weighted average scores at NUTS1 level are averages of the responses within each bracket weighted by size class, economic activity, and country to reflect the economic structure of the underlying population of firms.Due to relatively low levels of insurance coverage, many firms in the euro area currently have to bear most of the costs resulting from such extreme weather events (Chart 3, panel a). Recent research finds that closing this climate insurance protection gap could help to lower the impact of natural catastrophes on GDP (Chart 3, panel b).[14] Chart 3Share of insured economic losses related to natural catastrophes in Europe, and impact of large-scale disasters on annual GDP growth rate by share of insured lossa) Share of insured economic losses related to natural catastrophesb) Impact of a large-scale disaster on the annual GDP growth rate(1980-2023 average; percentages)(x-axis: quarter, y-axis: percentage points)Sources: European Insurance and Occupational Pensions Authority (EIOPA) dashboard on insurance protection gap for natural catastrophes, European Environment Agency (EEA) Damaging earthquakes and se